Turf Wars

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The Indian retail landscape remains a territory of unexplored opportunities. A huge latent consumer demand lies fallow at the ‘Bottom of the Pyramid’ and product innovation and category building have become a yardstick for exposing the Indian consumer to a plethora At the recently concluded national conference of food retailers, brand manufacturers and importers, the Food Forum India 2009, a topic that came up and passed by, was the why and wherefores of the ‘listing feof new brands. The tussle however, begins, when a new brand manufacturer approaches a retailer to list his products on his shelves.
e’ that modern retailers charge from the brands. Though Kishore Biyani, founder & CEO of Future Group, justified the retailers’ considerations, brand manufacturers remained unconvinced about the way the listing fee arrangement has been working in India.
The listing fee, also known as “slotting fee”, is a part and parcel of modern retailing the world over. The term was originally employed to describe payments to obtain a warehouse “slot” for a new product. However, the use of the term has changed over time resulting in varying interpretations and the lack of a standard definition.
The term, today, broadly refers to an up-front cash payment that a brand manufacturer has to make to the retailer in order to introduce his products at the retail stores. The fee is charged by the retailers, in order to defray the administrative and IT start-up expenses that they incur in the process of initiating such arrangements with a new vendor. Listing fee is also asked by retailers as a compensation for letting out their valuable shelf spaces to a new brand, the movement of which lies uncertain at the outset..
Listing fee in modern Indian supermarkets varies anywhere between Rs 2,500-5,000 per SKU. Also, everyretail chain has its own business model according to which, some retailers voluntarily decide to charge a listing fee, and others do not. For instance, Samar Singh Sheikhawat, VP of marketing at Spencer’s Retail informs that Spencer’s does not charge a listing fee. He further states, “I don’t think we can afford to charge a slotting fee.”
There are two contentions that retailers may have while opting for the listing fee model. First, a particular retailer while catering to his target consumer is obligated by the need to introduce greater variety and brand choices to his consumers. In doing so, high listing fees becomes a deterrent – as a barrier-free entry to more and more brands becomes important. On the other hand, another retailer may charge listing fees in order to ensure quality standard of the products and to ensure the seriousness of the manufacturer about staying in the business. Such a move helps them ‘screen’ brands and evaluate products under them. However, it in no way implies that a retailer who chooses the former model compromises on quality, and another retailer who chooses the latter model, is efficiently being able to deliver on it.
Two Schools of Thought
The two schools of thought that have been doing the rounds among debates on the slotting fee arrangement are: The efficiency school of thought and, the market power school. The efficiency school contends that slotting fees improves the efficiency of introducing and distributing products where brand manufacturers use the fees to “signal” a product’s probable success and, retailers rely on the fees to “screen” out product failures. Slotting arrangements, according to the efficiency belief, are also motivated by the rising importance and increasing effectiveness of trade promotion and in-store marketing. The market principle school on the other hand states that slotting fees represent an abuse of power by retailers and wholesalers that disrupts channel cooperation and stifles Innovation.
The two streams of thought, in India, seem to be present in a complex and debatable mix. The listing fee arrangement in Indian supermarkets, which gets initiated in the name of efficiency (since retailers do have genuine cost concerns) may result in a number of brands being choked by the fee conditions. And if these are the brands that are low on resources but high on value proposition, category growth could end up being victim. This is apparent from the remonstrance of several CPG manufacturers and importers. Saumil Thanawala, director, marketing, Amalgam Speciality Foods, remarks, “There currently seems no rationale behind the listing fee that the retailers charge from brands. It’s purely a part of the real estate rental that is being recovered from the brands.”
Corroborating this, Yash Verma, head, marketing, Himalya International says, “The system of charging listing fees by the modern retailers basically has little rationale except to generate income from whatever source they can, and by whatever method available to the retail chain. If the reasons are reasonable, they can be understood; in most cases, they (listing fee systems) are whimsical.” Talking about the rationale behind the listing fee, however, almost all brand manufacturers and importers acknowledge the concerns, that drive retailers to look for revenue sources. However, it is the services that they receive (or not recieve) in lieu of the slotting fee that causes much heartburn.
As is the case with a common definition for the term slotting fee, there is disagreement still on what all should comprise the services that are delivered in exchange for the same. As a matter of fact, this is the point where views of most importers and manufacturers differ as well. While Sanjey Bajoria, md, Bajoria Foods, and Dhiraj Dama, director, MKR Foods, state that retailers offer instore promotions, and superior product placement for greater visibility of their products in return of the listing fee, there are others who disagree.
Vipin Aggarwal, director, GEPL, believes that retailers do not provide sufficient promotions and marketing opportunities to their products. Thanawala agrees, and notes, “We have a substantial expense percentage being invested towards the listing fee, and this is purely a capital expenditure for us. Instead, if we can divert the same budget to sample the new products at retail counters, it will help in overall growth.” At many of the larger retail chains, product promotions, increased brand visibility and such offers form part of the listing fee agreement. At others, there is, allegedly, a verbal interface with the respective category heads. In cases of verbal agreements, many a time, there arise instances of retailers not being able to meet the brands’ Requirements.
On the deliverables that brands must receive from the retailers, Thanawala suggests, “We should in return get free use of space for sampling/product inserts in retailpublications, have access to monthly reports and MIS (Management Information Systems), cross promotions, brand tie-ins, publicity through panels/ backlist/announcements etc.” Aggarwal states that there is an urgent need for formalisation of the process of listing fee. This includes: having written acknowledgements about the slotting arrangement, product placements and other deliverables. Verma also calls for a need to have better services, in-store promotions and transparency from the retailers’ side.
Another bone of contention pertaining to the slotting fee arrangement is the fact that newer brands find it difficult to shell out the slotting allowance, especially at a time when they desperately seek collaboration with retailers to promote a nascent category. It is at this stage perhaps that cooperation from retailers is of prime importance. Most manufacturers are required to make an up-front payment that – according to the number of SKUs they want to be present in – reaches an amount measured in lakhs. Aggarwal informs that his slotting allowance expenditure ranges between Rs 1-2 lakh per annum, while Himalya International’s payout is around Rs 50,000 per month.
Having said that, brands and importers suggest that retailers may introduce a system of charging an ‘introductory allowance’ at the initial stage. After having received the introductory allowance, the remaining part of the slotting fee may be recovered in a phased manner, as the product starts moving. This is also what Thanawala implies, when he proposes a ‘Fixed’ and ‘Variable’ model of operating the slotting fee system. While a fixed minimum amount, according to Thanawala, could be charged as an up-front payment at the first stage, the balance of the listing fee could be received in a phased manner in sync with the revenues that the brand generates. A practice such as this would ease out the financial stress on new brands before they even begin reaching consumers.
Exclusion of Competition
While many manufacturers agree that the terms of trade between a retailer and the manufacturer are negotiable and many a time the latter ends up winning a good deal, thereare others who remain discontented.
Coming back to the market power belief, a system of paying an up-front listing fee inherently tends to place disproportionate power in the hands of a few brands, marketers and retailers. While brands that have had a success track record of two to three years in a territory become more capable of negotiating and paying a slotting allowance, relatively new entrants have to grapple for an affordable entry into modern trade. This in turn may lead to the exclusion of some potential brands that can expand consumption in nascent categories, analysts believe.
The competition thus, becomes imperfect as it results in too much selling power in a few brands’ hands. On the other side of the coin are the retailers, who because of their strong presence, both in terms of private label products and profitable stores, could attain greater bargaining power, and in return charge higher slotting fees from the brands. While the former scenario seems well in the offing in India, the latter is still to arrive, as the traditional trade channels continue to thrive and, the success rate of private label products await the testimony of time.
The point however, remains that in a largely unbranded consumer market like India, monopolistic competition represented by a few brands and retailers does not augur well. It isthe consumers that both the brands and retailers cater to, and it is ultimately the consumer who suffers in such a market scenario.
While it cannot be denied that the slotting fee system has a genuine business motivation, the shape that this system tends to acquire is clearly a matter of concern. Even as the debate continues the world over and conclusions remain to be drawn, a balanced act of greater consideration on the part of retailers may prove fruitful.
“Listing fees should be rationalised and if at all it has to be fixed, it should be calculated category wise, not SKU wise,” notes Verma. “There should be a separate set-up finalising this arrangement in the establishment, and it should be made uniformly applicable to all manufacturers or vendors. New brands/products should receive some ‘special’ consideration and can be linked to their sales generation.”
Thanawala also calls for a central body to handle the listing fee system as he contends that multiple layers of representatives for getting the products approved, inconsistent demands and, the absence of a single-window clearance mechanism makes the whole procedure more cumbersome and opaque.
“A common goal should be set by the retailer and brand owner along with timelines. Based on the objectives and timelines, a plan should beput in place, and this can be monitored by the supplier,” he says. “At achievement of each milestone certain bonuses and rebates should be allowed to the retail chain and brands, both qualitatively and quantitatively. All this should be done keeping the consumers’ interest as top priority.”
Thanawala also calls for an introduction of the ‘Product Lifecycle Concept’ and a system of charging the slotting fee commensurate to a product’s stage in its lifecycle. Dama, however, contradicts this view, pointing out that in the Indian context it is difficult to predict the movement of a particular brand and product accurately, and to ascertain which brand is at what stage of its lifecycle.
It cannot be denied that there is clearly a need for greater product innovations and the introduction of newer categories to boost consumption in India. While innovative manufacturers can help populating modern trade with greater depth and width of merchandise, it is for the retailers to work in close coordination with brands in order to promote healthy inter-brand competition, without being driven by a fixed policy diktat. As time moves on and modern food retail continues to consolidate and learn lessons by trial and error, it is for the mutual benefit of all the stakeholders in the food retail business to make a stitch in time.
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